2019 Proposed RFS Volumes: The Deep-Dive Analysis

August 23, 2018 |

by Antoine Schellinger
Special to The Digest

In what has now become the final RFS2 issued policy under Scott Pruitt, there is no change from the policy established in the proposed and final 2018 Renewable Volume Obligation (RVO).  The use of cellulosic waiver authority still dominates the rationale.  EPA still back calculating (“implied volume requirement”) a 15 billion gallon per year corn ethanol market in establishing standards.  Should there be litigation over this methodology (quite likely), 2018 and 2019 will be lumped together and ruled on accordingly.

EPA hinted that it might present a NPRM around the rules for RIN ownership designed to prevent hoarding and market manipulation.

EPA is not yet ready to respond to the remand from the DC Circuit to not cite “inadequate domestic supply” as a rationale for invoking “general waiver authority”.  Case law is Americans for Clean Energy v. EPA, 864 F.3d 691 (2017) (“ACE”).

All proposed rule changes such as pathway U and bio-intermediates remain in purgatory and have not been commented on in ~2 years.

In order to refresh the main arguments, I have reprinted the Executive Summary from my July 2017 report which laid out the arguments used again in the July 2018 publication.

2017 RFS2 Update Executive Summary:

EPA actively seeking ways to minimize the Renewable Volume Obligation (RVO) from RFS2.  Interpretation is that this is a cost on the public and must be diminished.  Former interpretation, and general court interpretation, is that statute is technology forcing and that legislation requires market to adapt to ever increasing amount of biofuels in the transportation pool.

EPA rationale for minimizing volumes (in rough order of reliance)

1.       Minimize the projected volumes of cellulosic biofuel production.  Then use the cellulosic waiver authority expansively to reduce all other forms of biofuel by an equal amount.  This is a new interpretation of the cellulosic waiver authority and will certainly be the subject of litigation.

a.       This is the only authority actually invoked in this NPRM.

2.       Rely on demand side constraints to limit the RVO since there is nowhere to put the volumes into the system.  This is already largely been defeated by the 28Jul2017 DC Circuit ruling stating that the EPA is not authorized to consider demand side restraints.  Congress intended the market to adjust.

3.       Use the general waiver authority should there not enough existing proven capacity to meet the RVO.

4.       Use the general waiver authority under the name of “severe economic harm.”  If invoked, and quite possibly should the cellulosic waiver authority interpretation fail, this will be the next subject of litigation.

5.       Invoke the “reset rule.”  Something of the nuclear option stating that this program has gone so far awry that we as administrators have the authority to throw out all of the Congressionally mandated volume.

This simply frames up the battle that is now to be fought by the EPA.

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Carryover RIN Bank Size

Estimate RIN carryover in Dec 2017 was 2.22 billion RIN carryover.  Now estimate that bank to be 3.06 billion RIN’s with 2.25 billion due to hardship waivers granted to small refineries for compliance years 2016 & 2017 combined.

EPA states that this amount of RIN bank is OK since less than 20% statutory maximum (very friendly to obligated parties to have excess RIN’s in the market) and will not consider total number of carryover RIN in setting 2019 obligations.

EPA states that it “the amount of additional small refinery hardship exemptions that may be granted in the future” either.

The EPA also states uncertainty around the results of the remand from “ACE” on past compliance year obligations.

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Cellulosic (D3) RIN’s

D3 Liquid Volumes use the 14th and 15th percentiles for new producers and existing producers, respectively.  Resulting in a projected volume of 24 million gallons in 2019.

Add CNG/LNG contribution of 358 million gallons and you arrive at the 381 million gallon target.

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As a result of using the full cellulosic waiver authority, the RVO’s almost completely depend on the production of D3 RIN’s.  2019 numbers using the same past methodology.

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Stance on potential use of General Waiver Authority.  EPA is still seeking arguments to make the assertion that the imposition of “severe economic harm” is enough justification to further reduce the RVO via the General Waiver Authority.

“Although we believe that the 2.8 billion gallon volume is attainable, and any shortfalls could be met through the use of carryover RINs, we also solicit comment and supporting data and rationale on whether circumstances exist that would warrant further reductions in volumes through the exercise of the general waiver authority (e.g., due to severe economic harm). We recognize that identifying severe economic harm caused by the implementation of RFS requirements is a difficult and complex issue and one of intense interest to a number of stakeholders. We discussed in past notices, and in the most recent annual rulemaking for 2018, the type of information we generally think would be relevant to identifying severe economic harm. For example, in 2008, we examined modeling showing expected levels of production and price for both corn and ethanol with and without a waiver. We also provided quantitative estimates of the impact of a waiver on: food expenditures for average and lowest quintile households; feeds costs for cattle, pigs, poultry and dairy; and gasoline prices and gasoline expenditures for average and lowest quintile households.”

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Below are the comments comparing the final 2018 RVO versus the proposed 2018 RVO

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Pg. 59489 (Exec Summary)

  • EPA only invokes Cellulosic Waiver Authority under this Final Rule
  • Restated that has authority to invoke “General Waiver Authority”
  • Restated that if biomass based-diesel causes a feedstock disruption to other oleo-chemical manufacturers then still has authority to reduce D4 accordingly

Sec II (A) 1 (Pg. 58492)

  • Americans for Clean Energy v. EPA, 864 F.3d 691 (D.C. Cir. 2017) stands for the assertion that the EPA MAY consider demand-side limitations for the “cellulosic waiver authority”, but did not extend that consideration to other waiver authorities which “detail the considerations and procedural steps that EPA must take before waiving fuel requirements”

Sec II (B) 1 (Pg. 58494)

  • Granted hardship waivers resulted in the return of ~125 million 2016 vintage RIN’s back into the marketplace
  • EPA stated that the possibility of additional hardship waivers exists

Pgs. 58499-501

  • EPA discussed actual RIN generation versus nameplate capacities for liquid cellulosic producers. The numbers reveal that “established” producers underran even the low end estimates, but the “new facilities” outpaced their high end estimates.  Thus instead of using (43rd percentile and 1st percentile to set volumes), they are now using 12th and 10th.
  • Net result 14 million gallon projection now versus 17 million in the proposed rule

Pg. 58505

  • Important chart outlining the extent to which the EPA believes it can interpret Cellulosic Waiver Authority.  They choose a gallon for gallon basis.  Statute says 7,000 million gallons D3 (cellulosic) fuel.  2018 RVO is 288 million (including LFG-derived CNG).  Therefore volume-based reduction is 6,712 million gallons.  Therefore can reduce Total Renewable Fuel RVO from 26,000 million gallons to 19,288 million gallons.
  • This interpretation, which appears to be court supported, is the number one basis on how the 2018 Total RVO is calculated.
  • This interpretation of authority remains the battle ground for litigation

Pg. 58517-8 discussing using the Severe Economic Harm element to justify use of the General Waiver Authority

  • Obligors (refiners) did not fare well with this argument, “For instance, several obligated parties stated that the purchase of RINs to comply with the applicable standards represents a significant economic burden to their companies. Some also indicated that they are considering filing for bankruptcy. However, these commenters did not provide sufficient evidence that the purchase of RINs, as opposed to other market factors, is responsible for the company’s difficult economic circumstances, or why they cannot recoup the cost of RINs through higher prices of their products, or the arguments presented were unconvincing. None of the commenters provided compelling evidence that the proposed RFS volume requirements for 2018 would be likely to cause severe economic harm to a region, State, or the U.S.”

Pg. 58523

  • No small refinery exemptions have yet been granted for 2018

(pg 14 of 89) The EPA has initiated a technical analysis to determine if it may invoke the “Reset Rule.” If invoked, it would allow the EPA to discard the Congressionally mandated volumes through 2022 and quite likely result in a significant reduction in proscribed volumes.

(pg 10) The EPA has significantly broadened its interpretation of the Cellulosic Waiver Authority to now encompass an associated reduction in advanced biofuels and total renewable fuel volume. This will almost certainly be the subject of the next round of litigation.

(pg 16, 18) The EPA could not ascertain a rationale to use the General Waiver Authority to reduce the overall renewable volume obligation. However, it invited commenters to make a case to invoke the authority. Public invites are issued not to comment on the rule, but to provide rationale on how the EPA can further reduce the RVO in the final rulemaking scheduled to be published in Fall 2017.

A fundamental tenant of prior rulemaking notices was that Congress intended for RFS2, via EISA, to be a “technology forcing” statute. That the EPA had a duty to keep pushing the boundaries of renewable fuel production until it met Congressional goals.  This document communicates the polar opposite in that it focuses almost exclusively on existing production facilities to determine a minimum volume obligation to minimize cost to the transportation fuel industry.

(pg 27-30) The EPA significantly modifies the D3 RIN (cellulosic biofuel) obligation based on actual production in CY2016. In prior years, the EPA has made an attempt to project ramp up rates of newly constructed facilities. That approach has been abandoned and now the RVO is based solely on past actual production volumes; the departure from EISA as a Technology Forcing statute. This is vital, since this logic, combined with the broad interpretation of the Cellulosic Waiver Authority, forms the basis for the overall RVO reduction from 2017 to 2018.

For comparison, for 2016 the EPA stated that New Cellulosic Facilities could produce up to 76 million gallons of cellulosic ethanol. The 2016 methodology used the 25% percentile between 0 and 76 million gallons to determine a RVO of 19 million gallons.  For new facilities that have been constructed but not yet produced product, the EPA makes an RVO of 1 million gallons despite a combined nameplate of 109 million gpy.  History suggests that using the 25th percentile might be a bit optimistic (that would be 27 million gallons), but to go from 27 million to 1 million in a single year is a clearly biased move.  This methodology is certain to be a target of the “neutral aim at accuracy” test.

The EPA states that 2017 actual production volumes could be considered in the final ruling. The EPA also requests comment on this methodology which it will, no doubt, receive.

(pg 32-33) Total Cellulosic Biofuel RVO and the importance.  So here is the punchline.  The EPA, determined a cellulosic biofuel RVO of 238 million gallons.  Based on 238 million gallons being only a fraction of the 7 billion gallon mandate (a 96%+ reduction), the EPA states that it must use the cellulosic waiver authority to reduce the mandate number – this is consistent with past practice. The departure and crux of the piece is that the EPA then extended that same authority to apply to the “applicable volumes of advanced biofuel and total renewable fuel.” (pg 17)

This incremental interpretation of the cellulosic waiver authority is likely to be the prime complaint from the pro-biofuels litigation corner.

(pg 34)  Another departure in policy is that the EPA has relied on other forms of advanced biofuels to fill that gap between the total mandated volumes and the shortfall in cellulosic biofuel specifically. The EPA has stated affirmatively that it is no longer pursuing that policy.  Principally biodiesel has been the main source filling this gap.

Quote summarizing these key aspects (emphasis added)

In previous years when exercising the cellulosic waiver authority to determine the required volume of advanced biofuel, we have taken into account the availability of advanced biofuels, their energy security and GHG benefits, and the apparent intent of Congress as reflected in the statutory volumes tables to substantially increase the use of advanced biofuels over time, as well as factors such as increased costs associated with the use of advanced biofuels and the environmental and food competition concerns raised by some commenters. In considering these factors, in those years, we have concluded that it was appropriate to set the advanced biofuel standard in a manner that would allow the partial backfilling of missing cellulosic volumes with non-cellulosic advanced biofuels. For purposes of this NPRM we are focusing primarily on the availability of advanced biofuels, their GHG and energy security benefits, and the costs associated with increased advanced biofuel mandates to propose no such backfilling with non-cellulosic advanced biofuel volumes in 2018. In other words, we propose to reduce the statutory volume target for advanced biofuel by the same amount as our proposed reduction in cellulosic biofuel. This action takes into account the fact that the substantial growth in advanced biofuel volumes after 2015 that was anticipated by Congress, and reflected in the statutory tables, was to be driven primarily by increases in cellulosic biofuel as opposed to non-cellulosic advanced biofuels. In addition, we recognize that the proposed approach involves placing a greater reliance on cost considerations than we have in past rulemakings. We believe this proposed new approach to balancing relevant considerations and exercising our discretion under the cellulosic waiver authority is permissible under the statute, and consistent with the principles articulated in FCC v. Fox TV Stations, 556 US. 502, 514-15 (2009), regarding circumstances when an agency may appropriately depart from prior policy.

The case citation here is the first salvo at defending the pending suit on the expanded interpretation of the cellulosic waiver authority which goes to the heart of the statute. Is the purpose of the statute to encourage growth and technological development of biofuels (past EPA mantra) or is the purpose to limit RVO’s to the existing (or even reduce) biofuel infrastructure that has been built to minimize the cost and impact of the RFS2 program to the refining fleet (current EPA mantra).

(pg. 35) The EPA then asserts that seed oils & greases that are used for renewable diesel and biomass based diesel are competing with other industries that use these feedstocks such as oleo-chemical producers (soapers – detergent, body soap, dish soap, shampoo, etc…).  This results in a statement that if we believe that biodiesel producers are competing with soapers (“diversion from other uses”) then that also falls under the discretion of the cellulosic waiver authority.

Here is an excerpt demonstrating the extension of logic on the cellulosic waiver authority (pg 36)

As described in Section II.A, when making reductions in advanced biofuel and total renewable fuel under the cellulosic waiver authority, the statute limits those reductions to no more than the reduction in cellulosic biofuel. As described in Section III.D, we are proposing a 2018 applicable volume for cellulosic biofuel of 238 million gallons, representing a reduction of 6,762 million gallons from the statutory target of 7,000 million gallons. As a result, 6,762 million gallons is the maximum volume reduction for advanced biofuel and total renewable fuel that is permissible using the cellulosic waiver authority.56  If we were to use the cellulosic waiver authority to this maximum extent, the resulting 2018 volumes would be 4.24 and 19.24 billion gallons for advanced biofuel and total renewable fuel, respectively, following standard rounding methods applied to the applicable volumes expressed in billion gallons with two decimal places, as done in previous annual standard-setting rulemakings.

Thus, EPA could potentially set the 2018 advanced biofuel standard at a level that is designed to partially backfill for the shortfall in cellulosic biofuel. However, based on our consideration of the factors described in more detail below, we are proposing to use the full extent of the cellulosic waiver authority. The proposed advanced biofuel applicable volume is, therefore, 4.24 billion gallons.57

In summary, the EPA has used the maximum possible extent of the cellulosic waiver authority to provide minimum possible RVO allowed under the statute.  This rationale will surely be tested in court.

(pgs 36-47) The next 11 pages test to see if the RVO can be further lowered by use of the “reasonably attainable volume” test.  Simply, is there enough production assets right now (with no growth) to produce this amount of fuel … the 4,238 million gallons and 19,238 million gallons respectively.  It states that there is with room to spare, but since we can use our maximum authority under the cellulosic waiver authority, we choose the lowest number.

(pg 48) The EPA assigns a cost to the legislation via a set of production cost calculations that are not included in the NPRM (they are included in an attachment).  The calculations are placed into a second attachment that is not readily available.  The calculation results are rather broad:

Sugarcane Ethanol
$0.58 – $1.53 per ethanol-equivalent gallon ($0.87 – $2.29 per gasoline-equivalent gallon)

Soybean Biomass-Based Diesel
$0.83 – $1.13 per ethanol-equivalent gallon ($1.36 – $1.85 per diesel-equivalent gallon)

The EPA conclusion: (pg. 48)

These costs are high on a per gallon basis compared to the petroleum fuels they displace. In light of these comparative costs, we believe it is reasonable to forgo the marginal benefit that might be achieved by establishing the advanced biofuel standard to require an additional 30 million gallons.

In other words, even though the reasonably attainable volume is higher than the minimum allowed under our interpretation of the cellulosic waiver authority.  Again underpinning the importance placed on the broad interpretation of the cellulosic waiver authority which tracks back to the cellulosic volume determination methodology.

To reinforce the conclusion that this as low as we could possibly make it: (pg. 48)

As discussed in Section I.E, we request comment on use of the general waiver authority to further reduce the required volume of advanced biofuel (with a corresponding reduction to the total renewable fuel requirement) in an effort to increase the energy independence impacts of the RFS program.

Footnote 77 (pg 48) even states what kind of evidence the EPA is seeking to further reduce volumes

77 EPA notes that while the factors considered under the cellulosic waiver authority to reduce volumes could apply to volumes beyond the reduction in cellulosic biofuel, EPA is limited in the exercise of its cellulosic waiver authority to reductions up to the amount of the reduction in cellulosic biofuel. Any further reductions would require a determination under the general waiver authority that the volumes would result in severe economic or environmental harm, or that there is an inadequate domestic supply.

Pgs 49-65 are discussion of demand side constraints … principally the E10 blend wall.  Those discussion are somewhat null and void based on the following court ruling. This opinion was issued ~3 weeks after the EPA NPRM was published.

Update on Case Law from 28Jul2017 with respect to prior EPA rulemaking on RVO determination:

Bottom Line Ruling from U.S. Appeals Court, District of Columbia Circuit:

At a high level, this affirms the court’s continued assertion that this is a technology forcing statute meant to drive the transportation fuel pool to ever higher portions from biofuels.  As such, a practical matter that there simply is not enough biofuels being produced to meet the mandate IS an eligible reason to use waiver authority (supply side constraints).  The fact that the market needs to adjust and adopt to an ever greater amount of biofuels IS NOT a reason to use waiver authority (demand side constraints).  The court is stating that the market must adjust and adopt.  In the current system, that means offering more E15 and E85 blends at the retail level.

Until 2017, the EPA & USDA initiated a blender pump program to assist retail stations in offering higher ethanol blends.  That program was halted under the current administration.

The EPA was holding the demand side restrictions as the next line of defense should the broad interpretation of the cellulosic waiver authority be challenged.  That is no longer valid.

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